Euro zone ministers are meeting in Brussels today in a bid to resolve a damaging row over the extent to which banks and other private investors may be forced to contribute to a second Greece bail-out.
Finance ministers from the 17-member Eurogroup start talks this afternoon, before ministers from the other 10 European Union states join in for a session formally dedicated to closer cross-border economic policy coordination.
But nine days from a crunch summit of EU leaders, at which Athens is looking for clear backing for a second multi-billion-euro bail-out in just over a year, the precise shape of the financial aid for Greece remains unclear.
Belgian finance minister Didier Reynders, invariably a reliable guide during negotiations, said at the weekend it should run to more than €80 billion, €25 billion of which could be funded by the private sector.
The remainder, diplomats have said, would come through loans from euro zone partners and the International Monetary Fund, and receipts from Greek state sell-offs, another part of the equation that remains uncertain.
EU economy commissioner Olli Rehn told German daily Sueddeutsche Zeitung today that 'we are not as far from reaching a solution as some think'.
He stressed that the European Commission is still working on a plan which would see banks agree to 'hold onto their bonds for longer, and on a voluntary basis.'
The German government wants private investors to pick up more of the tab after last year's €110 billion financial rescue was mounted solely at taxpayer expense.
The European Central Bank is deeply uneasy with that idea. It is sitting on a pile of Greek debt, either bought to help unfreeze credit markets accepted as collateral for lending to private banks.
Any move towards a 'rescheduling' or 'reprofiling' of Greece's €350 billion debt mountain risks unleashing what is termed 'a credit event' or de facto default, which the ECB fears could unleash chaos even beyond Europe.
A credit event is considered to be a modification of initial borrowing conditions and usually triggers downgrades if not a default rating by credit agencies.
Standard and Poor's slashed its credit rating for Greece yesterday by three notches, saying that it saw it as 'increasingly likely' that the deal being hammered out would under its criteria constitute a default.
Bank of France Governor Christian Noyer warned today that the euro zone risks having to finance all of Greece's economy if it forces a modification of Athen's debt and the country defaults.
France has been a leading backer of the ECB, and Noyer said: 'If a solution can be found that avoids the risk of a default, that would be acceptable to us'.
'If one can't be found and you touch the debt anyway and provoke a default or a 'credit event,' then you had better be prepared to finance the entire Greek economy,' he added.
The euro zone is locked in a race against time after EU and IMF experts warned that the latest €12 billion of bail-out loans needed in July can only realistically be paid out if a new longer-term financing deal is sealed at the June 23-24 summit of EU leaders.
Greece's ten-year bond yields jumped to more than 17% for the second time this year in response to the S&P move. They were trading at 17.57% this evening.
Portuguese and Irish 10-year bond yields were also higher, moving up to trade at 10.68% and 11.46% respectively.
Greece places short-term debt despite downgrade
Greece placed €1.6 billion in six month bonds today at only slightly higher yields despite a fresh ratings downgrade that evoked a higher risk the euro zone member would default.
The rate of return to investors rose to 4.96%, up from 4.88% paid in the last similar auction on May 10, with €3.2 billion euros in bids placed.
